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Rating Action:

Moody's downgrades U.S. Steel's CFR to B3; assigns B1 rating to senior secured note offering; outlook negative

02 May 2016

New York, May 02, 2016 -- Moody's Investors Service ("Moody's") downgraded United States Steel Corporation's (U.S. Steel) Corporate Family Rating (CFR) to B3 and its Probability of Default rating to B3-PD from B1 and B1-PD respectively. At the same time Moody's downgraded the senior unsecured notes rating to Caa1 from B2 and the industrial revenue bond ratings, guaranteed by U.S. Steel, to Caa1 from B2. The speculative grade liquidity rating remains unchanged at SGL-2. This concludes the review for downgrade initiated on March 31, 2016.

In addition, Moody's assigned a B1 rating to U.S. Steel's proposed debt offering of senior secured notes due 2021 and a (P) Caa1 to the company's senior unsecured shelf. Proceeds from the proposed secured note offering will be used to repay near-term debt and for general corporate purposes. The outlook is negative.

The downgrade reflects the significant deterioration in U.S. Steel's performance and debt protection metrics and expectations that continued weak performance will be evidenced given the challenging conditions facing the US steel industry, particularly for flat-rolled and tubular products. For the year ended December 31, 2015 U.S. Steel's adjusted EBITDA declined approximately 95% to $105.5 million from 2014 levels. For the twelve months ended December 31, 2015 coverage and leverage as evidenced by its EBIT/interest coverage ratio and debt/EBITDA ratio was -1.7x and 44.6x.

In addition, given the persistent challenges in the energy markets and U.S. Steel's exposure to the OCTG (Oil Country Tubular Goods) market, performance in 2016 is expected to continue to result in losses. Given industry fundamentals, we expect the time horizon for a recovery in the OCTG market to be extended as oversupply continues in the global oil markets, drilling activity continues extremely weak, and demand growth remains tepid. Further, the timing of an oil price recovery remains uncertain but we believe the time frame will be protracted. In addition, Moody's expects material reductions in E&P capital spending in 2016.

Downgrades:

..Issuer: United States Steel Corporation

.... Probability of Default Rating, Downgraded to B3-PD from B1-PD

.... Corporate Family Rating, Downgraded to B3 from B1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Allegheny County Industrial Dev. Auth., PA

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Bucks County Industrial Development Auth., PA

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Gulf Coast Waste Disposal Authority, TX

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Indiana Finance Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Lorain County Port Authority, OH

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Ohio Water Development Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

..Issuer: Southwestern Illinois Development Authority

....Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B2 (LGD4)

Assignments:

..Issuer: United States Steel Corporation

....Senior Secured Regular Bond/Debenture, Assigned B1 (LGD2)

....Senior Unsecured Shelf, Assigned (P)Caa1

Outlook Actions:

..Issuer: United States Steel Corporation

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

The B3 CFR considers U.S. Steel's elevated leverage, low interest coverage and weak operating margins. The rating also reflects our expectation that the steel and oil & gas industry fundamentals will remain weak and volatile in the near term and weigh on U.S. Steel's operating performance. Although prices for hot-rolled coil have moved up materially in recent weeks and import levels have slowed, we believe that some of the improvement is not sustainable and the second half of 2016 could see some slippage. In addition, the company's performance in the first half of 2016 will be negatively impacted by contracts renewed in the back end of 2015 when prices were lower.

The rating also considers U.S. Steel's relatively high costs as a percentage of sales given the less than optimal fixed cost absorption capability on reduced production and shipment levels as well as its material exposure to the OCTG market. The company's rating favorably considers its position as a leading North American flat-rolled steel producer whose footprint is further enhanced by its diversification in Central Europe. The rating also benefits from the company's strong liquidity profile.

The SGL-2 speculative grade liquidity rating reflects the company's solid cash position of $775 million at December 31, 2015 and full availability under its $1.5 billion asset based revolving credit facility. The facility requires the company to maintain a 1:1 fixed charge coverage ratio should availability be less than $150 million. The fixed charge coverage ratio is not expected to be tested and working capital release is anticipated as inventory levels are worked down. U.S. Steel also has a Euro 200 million unsecured credit facility at its USSK subsidiary in Europe, which expires July 15, 2019 and other smaller facilities at USSK.

The negative outlook captures the potential for industry conditions to weaken in the second half of 2016 and the company not be able to improve its performance notwithstanding capacity curtailments and continued success with its Carnegie Way program. Given the company's $4.7 billion in adjusted debt at year-end 2015, it would need to generate around $900 to $950 million in EBITDA in 2016 for any rating uplift.

Given U.S. Steel's metrics and the anticipated slow improvement, an upgrade is unlikely in the next twelve to eighteen months.

The ratings could be further downgraded if performance over the near term does not show improving trends such that EBIT/interest tracks toward 1.5x and leverage moderates closer to 5.5x. Ratings could also be downgraded should liquidity contract meaningfully or if market conditions reverse or deteriorate further from current.

Headquartered in Pittsburgh, Pennsylvania, United States Steel Corporation is the second largest flat-rolled steel producer in North America in terms of production capacity. The company manufactures and sells a wide variety of steel sheet, tubular, and tin products across a broad array of industries, including service centers, transportation, appliance, construction, containers, and oil, gas and petrochemicals. Through its major production operations in North America and Central Europe, U.S. Steel has a combined annual raw steel capacity of approximately 22 million tons. Revenues for the twelve months ended December 31, 2015 were $11.6 billion down from $17.5 billion for the twelve months ended December 31, 2014.

The principal methodology used in these ratings was Global Steel Industry published in October 2012. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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SUBSCRIBERS: 212-553-1653

Moody's downgrades U.S. Steel's CFR to B3; assigns B1 rating to senior secured note offering; outlook negative
No Related Data.
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